Homework Answers
a) Price of tablet in Canada (in terms of US dollars)
=501.59/1.32 = $379.9
Price of tablet in Mexico (in terms of us dollar)
=5390.28/19.31 = $279.14
Price of tablet in Brazil (in terms of us dollar)
=1260/4.20 = $300
As per purchasing power parity ratio of exchange rate of two countries must be equal to ratio of prices.
Hence purchasing power holds good in Canada but not in Mexico and Brazil.
B) Arbitrage involves
Buy the product from mexico
Total $ outflow: $279.14
Sell the product in US
Total $ inflow: $379.99
Arbitrage profit: $379.99 - $279.14 =$100. (approx)
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